Agency Compensation - Variables that Impact Pricing

It's tough to make predictions - especially about the future.
                                                                    - Yogi Berra

How much will it cost to build an x for us? Where x stands for Website, Microsite, Facebook Page, Mobile App (or even a House, a Bridge, an Aircraft Carrier). Tough question, right? The answer is, "It depends". What kind of x do you want?

Unfortunately, this question is asked by clients of their agencies every day. Given the recession hangover, fortunately it is still being asked. I find that a little education helps either avoid this overly, simplistic question or more productively, it helps point to a method for finding an answer. The approach pretty much has to do with helping your client (as well as your team) understand the variables that impact pricing.

While on the topic, in the spirit of precision, I like to define terms. In general, the price of services and/or deliverables is made of two components: fees (pretty much labor) and costs (usually pass-throughs, such as travel, licenses, equipment, etc.).

Below is a list of some of the variables impact the price of a project. As I hope you can see this list will generate some pretty interesting discussions that, if handled, properly will result in a level of professional empathy that should elevate all involved

• objectives’ clarity / validity
• strategy integrity / clarity
• project duration
• time of year   -   for info on an ugly confluence of factors, see Use It or Lose It
• program complexity
• state / quality of assets, briefing, brand and style guides
• 3rd party involvement (e.g. other agencies, technology vendors, email / sweeps vendors, client-internal parties [legal, IT, etc], client-external partners [other marketers])
• scale & volume (planned scale decreases pricing)
• review / approval process – including: cycle duration, feedback quality / consolidation, and number of stakeholders (e.g. marketing, legal, compliance, branding, etc.)
• specification quality / stability
• production value
• costs (e.g. photos, video, locations, research, technology, travel needs, etc.)

The old Triple Constraint is also a valuable concept to help frame an agency compensation discussion with clients and your team.

There's a wide range of things on the agency side that also impact pricing, such as available staff, their skills, their rates, etc. Is it fair to charge a client an Art Director's rate to do a Production Artist's tasks? Same answer, "It depends".


Let us know your thoughts or if you have some other major variables that drive pricing.

Use It or Lose It!

It's that time of year - where that is a variable for things like: "holiday", "peace", "joy", "depression", etc. For agency and client staff, it's Use-It-or-Lose-It (UIoLI) time. By UIoLI I'm referring both to:

• clients' end-of-the year rush to spend their budgets in order to squeeze out a last bit of performance or to justify next year's budget.
• vacation days & corporate policies for roll-over (or not as the case may be).

 These two UIoLI events come to a nasty head at the end of year. To a lesser extent, summer time with its holidays and summer Fridays, also has similar issues.
How can a dedicated agency person, leave her client, or for that matter, her team in the lurch during these critical times of year? This conundrum becomes even more complex because people both have long-standing plans, or faced with UIoLI, slap together last-minute trips. To turn up the temperature a few more degrees, on the client-side the same thing is happening, making the end of the year pretty much the sloppiest, most pressured, time of the year.

It only took me a few cycles of being one of the few saps (dedicated employees?) still in the office at 11pm on 12/23 and 7/3 to begin managing my and my team's vacation schedules. One approach I've taken rounding the Q3 corner, when my team wasn't burning their vacation days fast enough was to implement Winter Fridays, where they could at least enjoy some additional 3-day weekends. If someone has two weeks of unused vacation coming onto the 4th quarter, they can pretty much work it out so that they can have 4-day weeks for the rest of the year. Another approach was to encourage them to come in late or leave early. Of course, the "good" ones (you guys know who you are) would still manage to put in over 50+ hours, even in those shortened weeks. At least they got some down-time that they otherwise would not have had.

Their are many benefits to encouraging (or as some of the business literature suggests, "forcing") your team to take time off, including: higher retention rates and increased morale to learning time-management skills and driving productivity. The Harvard Business Review, Wall Street Journal, Business Week and many others have written extensively about these issues.

So, if you're not fortunate enough to live in a state like California, where vacation days are considered earned wages that roll-over from year to year, take the time you deserve. Trust me, you and everyone around you will be better off than if you give them back to the man.

Achieving Balance - Rigor and Flexibility

If nothing else, being a PM in an agency environment is about achieving balance. I'm just going to skim the surface of this topic in this posting. There are a myriad of competing forces to reconcile along the development continuum in order to find the win/win including:

Reliability & Innovation
Options & Recommendations
Breadth & Depth
Effectiveness & Efficiency
Client Goals & Agency Goals
Collaboration & Autonomy
IM & Email (or picking up the damn phone!)
Revenue & Profit
Branding & Response
Engagement & Accessibility
And the PM classic: Quality, Speed & Price

On the PM side, whether we're talking about employing a service delivery process, using tools & templates or just how one manages communication and relationships, it often comes down to balancing rigor and flexibility.

PM is a robust and mature disciple with a successful history in a number of complex industries. However, an agency environment, is not a construction site, a military base nor a software engineering firm. Many of the PM tactics, tools and tenets that drive success in those environments will choke the life out of an agency. Applied with the right sensibility and professional judgment the methodologies promoted by PMI, Prince2 and the like can absolutely enhance PM and overall agency performance. However, without the appropriate judgment to achieve balance between the rigor supplied by those approaches and the flexibility that must exist in an agency, a clash or a lose/lose is inevitable. Similarly the lack of predictability that comes along with iterative approaches, like Agile is sometimes too nerve-racking for clients or agency stakeholders to bear.

A PM who can effectively depart from a plan to the mutual satisfaction of all is far more valuable than one who can create a 700-line project plan and hold a team hostage with it.

Bend so you don't break.
Bend but don't bend over.

An Agency's Ability to Deliver - People Are Talking

Industry talk is tantalizing. Externally, aided in great part by the plethora of awards, trade pubs and blogs, buzz tends to center around account-wins, creativity, and to a lesser extent, results. Published industry evaluation reports (e.g. AdWeek's Digital Agency Report Card, Forrester's Wave Studies) evaluate similar things, but an agency's ability to execute efficiently is not considered. However, within the industry, peer-to-peer at the bar (like when one PM asks another about a shop she used to work at), an agency's working environment, and its ability to deliver, are main topics.

I've had the opportunity to get out and about to various industry events and conferences recently. Good form prevents me from listing details of what I've overheard. I will say that I was amazed at the consistency of buzz about certain agencies from one event to another and how well it aligned with the trash-talk I've heard inside of various agencies. The lack of understanding by some non-creative agency parties about the challenges of managing clients and creative/tech deliverables was striking as well.

An agency's reputation is important to maintain. Here are just a few areas where buzz comes into play.

• Hiring - In the current economic environment, agencies that are hiring have the upper hand. However, the best talent out there, especially those that have a stable gig, will still be applying even more scrutiny when considering whether or not to join a new shop.
  
  
• Business Referrals - Media companies often influence clients' choices of what creative agencies to work with or, believe me, to stop working with.
  
  
• Headhunters & Agency Recruiting Personnel- These guys hear it all. They get a regular insider's tour of agencies from the slew of talent they interact with. I've begged one of my long-term headhunter friends to write a book, I, and I'm sure others, would love to read it.
  
  
• Third-Party & Publisher Preference - Guess which agencies 3rd party vendors like PointRoll, EyeBlaster and EyeWonder are going to partner with and feature in their case studies for their newest, high-functioning units? Publishers are well aware of which agencies deliver on time, and which deliver heartache.
  
  
• Who's Got Your Back? - When the trash talk about your agency starts flying (usually behind your back), you want/need someone who knows your agency's and your work to chime in and support you.
  

I don't need to tell you that clients care very much about an agency's ability to deliver. Any agency evaluation report card, or feedback given by a client (especially those leading up to or following an account being put into review) consider agency efficiency and reliability very heavily.

PM's main mission is to ensure high-quality output that is delivered on-time, on-budget and on-spec. It's incumbent on you to not only execute on this and to form positive relationships with those who share the ecosystem with you. Obviously, this will help improve your ability to deliver together, but it will also improve your company's and your own reputation and your ability to thrive. I assure you, you will need it someday. As the Oracle of Omaha suggests:

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.”

- Warren Buffet

Advertising Agency Compensation - Exploring Alternatives

The premise here is simple: aligning agencies and clients around results, rather than squabbling about costs and time, which further drives the commoditization of agency services, is a win/win situation. Ad agencies are in a fight for survival. The opportunity for the brave and innovative to flourish has never been greater than right now. For those who don't/can't start thinking differently, look out for the tar pits.

This post takes up on some of themes introduced in the December 5th post, Achieving Balance in an Agency, where the value of certain agency activities and deliverables (e.g. a breakthrough idea) was examined.

Value-based pricing is not a new idea, but it's a good one that has been in place for a long time in the consulting and pharmaceutical manufacturing arenas among others. Many agencies and clients are stuck in the familiar worlds of commission-based or hours/labor-based compensation. At their worst, these approaches encourage reach-oriented (i.e. tonnage) marketing programs, support running up the clock to justify billable hours and perhaps worst, crush innovation and performance.

The barriers and risks to adopting this approach are not insignificant and include:

• Agency and client comfort/momentum in doing things the way they've always been done.
• Having enough influence on an overall program so that the value you envision and agree upon with a client can actually be created.
• Clearly defining success and therefore value (raise your hand if you've been part of a view-through debate)
• Determining pricing so that nobody loses their shirt and the agency doesn't miss out on the upside.
  

There are various individuals and groups that are promoting this approach. Ignition Consulting Group and The Verasage Institue spring to the top of searches on the topic. Ignition even has a presentation on the topic posted on slideshare.net that is quite informative: Burying the Billable Hour.

So, what does this have to do with Project Management? In a study that Ignition and VeraSage conducted on behalf of the American Association of Advertising Agencies (AAAA) and the Association of National Advertiser's (ANA), the 2, top-rated agency value-drivers according to marketers were:

1. Working in a collaborative way with the client by creating an environment of mutual respect.
2. Ensuring that agency functions are integrated and agency divisions collaborate on behalf of the client

Along with the fact that Project Managers are often at the heart of conversations around pricing, these two tidbits should help give you voice on important discussions about evolving your agency's relationship with its clients. On the business development front, RFP's almost always allow responses for alternative means of compensation beyond the cost+ calculations they require. Putting a value-based option in front of a prospect isn't likely to get taken up at the outset, but at least it will show that your agency has some life.

Speak up. Watch out for the tar pits!